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Assurers dodge consumer laws to sell funeral cover

South Africa’s main life assurance companies are selling funeral assurance using structures designed to side-step consumer protection laws.

For many years, the funeral assurance market has been one of the biggest arenas for abuses by life companies, administrators and salespeople. As a result, there has been a steady increase in consumer protection regulation.

The structures set up by life assurance companies to sell funeral cover and effectively nullifying the rights consumers should enjoy in terms of insurance legislation. Credit: Colin Daniel

The Financial Services Board (FSB) is investigating the structures. Jonathan Dixon, FSB deputy chief executive in charge of insurance, says the FSB is speaking to the life industry about the structures.

“We are concerned,” Dixon says, particularly because low-income consumers, most of whom are not financially sophisticated, are the main target market for companies that sell funeral assurance.

The structures work as follows:

If the funeral parlour, burial society or administrator fails to pay out or provide the funeral benefits, the “members” can take action only in terms of the Consumer Protection Act. The “members” lose all the rights conferred on them under a number of Acts and regulations, which include:

Normally, funeral policies, which are legally termed “assistance business”, are sold on an individual basis or under a group scheme, where each consumer is an indivi-dual policyholder but undergoes no underwriting, such a medical assessment.

An “assistance policy” is defined in the Long Term Insurance Act as one where neither the benefits nor the premium exceed R18 000.

There is nothing in law that provides for a “membership” structure where a single policy is issued in the name of a body that sells on funeral benefits; this is simply a loophole of which the life assurance industry is taking advantage.

Sanlam admits that, “in our view, and the view of our legal advisers, the structure where the funeral parlour is the policyholder falls outside the ambit of Part VII of the Policyholder Protection Rules, because it does not meet all the requirements of the definition of ‘assistance group scheme’ as set out therein”.

Anne Livingstone, chief executive of Sanlam Sky Solutions, says a funeral parlour that has been issued with a policy in its name will offer “members” various funeral service options relating to the choice of coffin and hearse and the type of catering.

The service options and the related membership fees are agreed between the funeral parlour and its “members” and are not regarded as an insurance transaction/premium but as a monthly membership contribution to the funeral parlour to procure the burial and other ser-vices, Livingstone says.

MEMBERSHIP STRUCTURES NOT PART OF PROTECTION RULES

The Policyholder Protection Rules (PPR) do not make any allowance for a life assurance company to sell a funeral policy (assistance business) to another party, such as a funeral parlour, that allows consumers to become contributing “members” of the policy.

Life assurance companies are attempting to pass off as group business the practice of selling a single policy to a funeral parlour.

But the PPR define an “assistance business group scheme” as the provision of policy benefits where:

The PPR also state that “group” means two or more people who, on the basis of group underwriting, have entered into a policy with an assurance company through an administrator (such as a funeral parlour) that has been given a mandate by the life assurer to facilitate its policies.

An “administrator” means a person or an entity that has a written mandate from an assurer to do administrative work in respect of a specific assistance business group scheme and that is licensed as a financial services provider in terms of, or who is a representative as contemplated in, the Financial Advisory and Intermediary Services Act.

A life assurance company’s agreement with the administrator of a group policy must include the following:

LIFE COMPANIES WON’T ANSWER THE KEY QUESTIONS

It seems that the major life companies see nothing wrong with side-stepping consumer protection legislation by selling funeral policies in the name of a funeral parlour, burial society or funeral benefits administrator.

None of the life assurance companies can explain why Parliament would enact legislation to protect consumers only so that it can be side-stepped and nullified. None of the life companies wanted to provide Personal Finance with details of the extent of their funeral assurance or membership structure business, or simply ignored our questions.

The responses that Personal Finance did receive from the assurers include the following:

Sanlam, which provided the most comprehensive response, says it believes that communities ensure that funeral parlours behave ethically.

Anne Livingstone, chief executive of Sanlam Sky Solutions, which services the entry-level market, says the role of the funeral parlour and its relationship with its members are unique and deeply embedded in African culture and the values of ubuntu.

“There are typically deep levels of trust between the members of the community and the particular funeral parlour. This relationship has many advantages, including reduced fraud and non-performance on the part of the funeral parlour.

“We believe that insurers contribute positively to the financial stability of the parlours with which they partner, which secures appropriate products and services to the end client,” she says.

Livingstone says the members have a claim against the funeral parlour to be provided with the agreed burial services. As a result of the nature of the relationship between the members and the funeral parlour, and the fact that the parlour is part of the community, the community in general will retaliate against a parlour that does not make good on its promises.

Livingstone admits that Sanlam does not police the provision of benefits, but “we endeavour to do business with reputable funeral parlours, and take complaints extremely seriously. We will not hesitate to terminate relationships with parlours which are found to be behaving unethically.”

Old Mutual’s executive head of the foundation market, Thembisa Mapukata, says that when selling policies to burial societies, Old Mutual:

Metropolitan, under whose brand MMI (Momentum and Metropolitan) sells funeral assurance policies, refused to answer the questions submitted by Personal Finance.

Belinda Faulkner, Metropolitan brand executive, says it would be premature to answer the questions, because “we are currently in the process of engaging with the FSB [Financial Services Board] in regard to this issue in the context of the binder regulations. We will be happy to provide you with the answers to your questions post the outcome of our discussions with the FSB.”

Note: the binder regulations cover the white-labelling of a life assurance product and have nothing to do with funeral assurance sold through a membership structure.

A few years ago, Metropolitan’s refusal to take responsibility for its white-label products led to a change in legislation and a toughening up of the binder regulations.

Liberty Life admits that it uses the membership structure but claims it treats the members as policyholders.

Graham Thomas, head of risk product solutions for Liberty Corporate, says the policies are sold primarily under its Capital Alliance Life Group Risk and Liberty Active Limited licences.

Thomas says Liberty seeks to ensure that, where the policy is issued to an institution (whether a funeral parlour or an independent administrator), “the family of the deceased is protected, because the costs associated with the funeral are paid for. So, although we issued the policy to the institution, we treat the underlying members as individual policyholders …

“Our view on these structures is that they create a mechanism for reaching policyholders who otherwise would not normally be reached by the insurance sector in terms of individual or retail policies. Having said that, it is important that the compliance and governance issues around these policies are applied properly to protect the individual members and their families.”

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